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Euro debt crisis threatens to sink global economy

Last updated: 09 October, 2011
Liz Alderman and Jack Ewing, NYT,

The debt problems in Europe that have roiled global financial markets for the last 18 months are showing signs of turning into a far deeper challenge: Europeís second recession in three years. Greece, Ireland, Portugal and Spain are already in downturns or fighting to avoid them, as high unemployment and austerity belt-tightening take their toll.

Luciana Gemo cuts fabric at the factory of the Italian clothing retailer, Marly's, whose Managing Director is discouraged with Europe's economic troubles, in Arzignano Vicenza, Italy. NYTBut in the last few weeks, even prosperous Germany and France, the continent’s powerhouses, have started to be dragged down, hurt by the ebbing of business orders from indebted countries in the rest of Europe.

European stocks continued their latest plunge, as the German financial giant Deutsche Bank, buffeted by the debt crisis, reduced its profit forecast for the year. Investors were also jolted by news that the French-Belgian investment bank Dexia might be the region’s first large bank to need a government rescue as a result of the current debt crisis.

It is not just the continent’s problem. The United States, a major banking and trading partner with Europe, is stuck in its own rut, prompting the Federal Reserve Chairman Ben S Bernanke, to warn that “the recovery is close to faltering.” He told a congressional panel that the economy could fall into a new recession unless the government took further action.

United States stocks ended up for the day but had bounced wildly on jitters about Europe and rising fears that Greece will have to default on its billion sovereign or government debt. The Greek finance minister said recently that the country could continue to pay its bills at least through mid-November, after other European finance ministers said Greece would not receive its next installment of bailout money before next month, if then.

A downturn in Europe, if it happens, could potentially help tip America back into recession and would undoubtedly ricochet around the world. Europe’s banks are among the most interconnected in the world, and the euro is the world’s second-largest reserve currency after the dollar.

The 17 European Union nations that share the euro together account for about one-fifth of global output. And emerging markets that are important customers for European exports, like China and Brazil, are beginning to retrench.

“We are the epicenter of this global crisis,” European Central Bank president Jean-Claude Trichet said at the European Parliament recently. A growing chorus of analysts now predict that Europe is heading for an outright recession. “The sovereign debt crisis is like a fungus on the economy,” said Joerg Kraemer, the chief economist at Commerzbank. “I thought it would be just a slowdown,” he said. “But I have changed my mind.”

Goldman Sachs predicted that both Germany and France would slip into recession, although other forecasts are less grim.

Already, the eurozone economy has slowed to essentially zero growth. It could stay in a slump, many economists say, at least through next spring. If that happens, tax revenues are likely to fall and unemployment, already high, is expected to rise, making it even more difficult for Europe to address the sovereign debt crisis and protect its shaky banks. In a sign of how quickly the ground is shifting, the European Central Bank might lower interest rates, just a few months after it started raising them in what is now seen as a misguided effort to stem incipient inflation.


Rampant distress

Distress is increasingly evident across Europe. French businessman Philippe Leydier had been feeling more upbeat until this summer, when orders for his company’s corrugated boxes suddenly began to slide. Orders fell further last month, as auto parts makers, electrical engineering firms, farmers and other industries reduced production.†††††† “The euro crisis and the financial crisis linked to the debt of European countries is serious,” said Leydier, whose box and paper manufacturing firm, Emin Leydier, in Lyon, often provides an early signal of seismic shifts in economic activity. “European governments need to find a solution - and fast.”

In Italy, which has the eurozone’s third-largest economy, after those of Germany and France, a 45 billion euro austerity programme aimed at reducing debt has many worried about a recession. Recently, the ratings agency Moody’s downgraded Italian government bonds by three notches, to A2 from AA2, and kept a negative outlook on the rating. Paolo Bastianello, the managing director of Marly’s, an Italian clothing retailer, is increasingly discouraged. At the start of the year, Bastianello was more optimistic that Europe would escape its troubles and that Italy’s government might seriously tackle the country’s problems. “But the turbulence of the markets and the uncertainty about this abnormal mass of public debt just scare people away from buying,” he said. Not everyone is so pessimistic. Some German executives say sales remain healthy, at least so far. “We don’t see any impact on our business,” said Munich-based electronics and engineering giant Siemens management board member Roland Busch.

“The economy is cooling down but not more than that,” said Busch, who oversees a unit that supplies traffic-control systems, streetcars and other products for public works. Expecting demand for urban infrastructure improvements to grow, Siemens plans to add about 150 people over the next two years to its 850 employees at its complex in Sacramento, California, that makes light-rail cars. Bucking the trend almost everywhere else in the developed world, unemployment in Germany continues to fall, and there are shortages of skilled workers in several important sectors. “We know Germany is an exception,” said IG Metall union spokesperson Joerg Koether. Jens Weidmann, who runs Germany’s central bank and serves on the executive board of the European Central Bank, predicted last week that the nation would hit “a soft patch” but escape recession.

Commerzbank predicts German growth will slow almost to zero in the fourth quarter of 2011, but not actually decline. At best, though, it expects Germany to grow by no more than 1 per cent in 2012.

IMF optimistic

The International Monetary Fund is a little more optimistic, predicting growth of 1.3 per cent next year in Germany after a healthy pace of 2.7 per cent this year.

But the IMF recently acknowledged that it, too, had overestimated the rate of Europe’s recovery. It now forecasts that growth in the eurozone will slide to 1.1 per cent in 2012, after a 1.6 per cent gain this year. In Spain, where tens of thousands of protesters have called for the government to ease its austerity plan, the IMF expects growth to pick up to 1.1 per cent next year from 0.8 per cent this year. Still, unemployment in Spain remains at 20 per cent, and youth joblessness is nearly twice that rate. American pharmaceutical giant Pfizer recently said that it would cut 220 Spanish jobs.

The economy is worse in Portugal, which is operating under a bailout agreement with the European Union and the IMF. The IMF warned the new prime minister, Pedro Passos Coelho, that Lisbon still needed to find an additional 1 billion euros in budget savings. But further austerity may only deepen the downturn, with Portugal’s economy expected to fall by 1.8 per cent this year and 2.3 per cent in 2012.

Joao Figueiredo, the owner of a small ship repair yard in Lisbon, expects his first annual loss since 2002. “There are now many clients who are late in their payments and whose money I will probably never see,” he said. The worldwide dimension of the financial crisis, Figueiredo added, made the outcome even more uncertain. “We’re now in the middle of a crisis that started in American real estate and then crossed over to Europe, and it seems really nobody has any idea where this will go next and for how long.”

Portugal’s slump convinced Francois Libner of Libner SA, a manufacturer of delivery truck bodies, that it was hopeless to keep trying to sell there. After growth in Portugal, Greece, Spain, and Italy started to trail off last year, he shifted focus to Germany. Libner figures it will take a decade for any real growth to return to southern Europe, particularly Spain and Greece, which he classifies as “a catastrophe”.


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